Tokyo shares closed down 10.55 percent as panicking investors dumped stocks after the government said levels of radiation leaking from a stricken nuclear plant posed a threat to health.
The Nikkei index clawed back some ground from an earlier freefall to close down 1,015.34 points at 8,605.15.
The Topix index of all first section shares fell 9.47 percent, or 80.23 points, to 766.73
Prime Minister Naoto Kan said there was a high risk of elevated levels of radiation from a reactor at the Fukushima nuclear power plant that exploded earlier in the day.
He urged people within 30 kilometres of the plant to stay indoors.
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Authorities said an explosion at the No. 2 reactor at the Fukushima Daiichi nuclear power plant, located northeast of Tokyo, appears to have caused damage.
Some staff had been evacuated from the facility as radiation levels at the site rose sharply.
In volatile trade the yen dived against the dollar before snapping back as traders worried about the escalating nuclear emergency.
The dollar rose to 82.01 before falling back to 81.47.
